The Morningstar® Wide Moat Focus IndexSM(“U.S. Moat Index”) trailed the broad U.S. equity markets as represented by the S&P 500 Index in May (-7.97% vs. -6.35%, respectively). Although historically a benefit to the Index, stock selection was the primary driver of the negative return differential between the U.S. Moat Index and the S&P 500 for the month.
Jones Lang LaSalle, Inc. (JLL) was the most troublesome individual overweight in the U.S. Moat Index. JLL posted a -19.23% return in May and also saw its moat rating downgraded from wide to narrow on May 21, 2019. Morningstar cited the cyclical nature of the real estate services industry, which is also in the process of rapid consolidation. Concerns that JLL and CBRE, the other major player in the industry, will compete more directly as a result of this consolidation was the primary driver of the downgrade. Morningstar continues to believe JLL boasts a strong reputation and benefits from switching costs, one of the five sources of moat identified by Morningstar, but their conviction on the sustainability of the company’s competitive advantage now stands at 10 years rather than 20 years.
The U.S. Moat Index was also a victim of the fallout from trade negotiations between the U.S. and China. Its overweight exposure to semiconductor companies Microchip Technologies (MCHP) and KLA-Tencor Corp. (KLAC) contributed to underperformance. Morningstar views MCHP as one of the best-run companies in the industry, and fair value estimate increases in November 2017 and March 2018 allowed the company to enter the Index. KLAC has positioned itself as the dominant player in the process diagnostic and control segment of the semiconductor industry. Its tools and technical expertise enable chipmakers to inspect and identify defects in the chip production process. Morningstar analysts recently reaffirmed their fair value estimates for U.S.- and European-based chipmakers despite much of the headline-grabbing news emanating from the U.S. and China.
Not all news was bleak for the U.S. Moat Index in May. Several health care companies (AmerisourceBergen, Medtronic, McKesson and Pfizer) and consumer discretionary companies (The Hershey Co., McDonald’s and Mondelez International) provided a welcomed boost to relative performance.
The U.S. Moat Index will undergo its next quarterly review in late June, at which point the eligible U.S. stock universe will be reassessed based on moat ratings and valuations. This will allow the Index to target the companies that Morningstar believes to be underappreciated and possess strong, sustainable competitive advantages.
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This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
Fair value estimate: the Morningstar analyst's estimate of what a stock is worth.
PriceFair Value: ratio of a stock's trading price to its fair value estimate.
The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc
The Morningstar® Wide Moat Focus IndexSM consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
S&P 500® Index: consists of 500 widely held common stocks covering the leading industries of the U.S. economy.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date.
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